10-14-09 - Economics 448 Class Notes 10/14/09 Economics...

Economics 448 – Class Notes – 10/14/09 Economics 448: Mortgage Markets at Work • There is a promise of a stream of payments from homeowner to mortgage lender The “promises” are very illiquid – if I wanted money in the short term, I couldn’t get money from these illiquid assets • Example: a 30-year obligation (loan obligation) o This was a real problem during the depression: o I took the money from savers and gave it to borrowers. o The borrowers wont give the money back for another 30 years Freddie Mac – will buy your loans and guarantee your loans and then try to sell these loans to other people • Secondary Mortgage market • Good because loans could be sold to Freddie Mac • This generated liquidity in the mortgage market where it used to be really illiquid • Freddie Mac  free up liquidity in the mortgage market  MAIN PURPOSE Nobody understood the risk involved in the loans that were purchased – AAA rating vs. BBB rating • The interest rate for someone with a BBB credit rating are going to have a higher

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